The Rundown on Crypto Mining
Cryptocurrency mining has been around since the creation of Bitcoin – the world’s first cryptocurrency – in 2009.
While crypto “mining” has nothing to do with the standard definition of physically mining for gold or precious metals, the analogy is helpful to understand what crypto mining is and how it works.
The most basic explanation of cryptocurrency mining refers to the process by which computers perform some kind of work or service for the network and are rewarded with cryptocurrency. Cryptocurrency, therefore, acts as incentive to maintain the network.
Depending on the cryptocurrency you mine, the process and requirements for mining will be different. However, every cryptocurrency has these features in common: a blockchain, a consensus mechanism, and individual validators (the miners) who are rewarded with cryptocurrency.
We will talk about these concepts in greater length. Let’s look at Bitcoin as an example.
With Bitcoin, computers compete to solve computationally complex mathematical problems referred to as “hashing” puzzles in cryptography. The first computer to solve the puzzle is then granted the right to update the new “block” of transactions in the digital ledger – or the blockchain – which is cryptocurrency’s famous underlying technology.
There is a certain amount of randomness involved in the process, with computers performing trillions of mathematical operations until they find the solution. It’s an arduous process, but suffice to say, the fastest and most powerful computer has the greatest chance of winning.
By solving the puzzle with their sophisticated hardware and intensive energy input, miners are granted the right to validate the blockchain and are rewarded with BTC for doing so.
Proof of Work (PoW) Explained
The Bitcoin blockchain and its mining process is governed by a certain protocol called Proof of Work (PoW). PoW, a type of blockchain consensus mechanism, refers to the above-described process of performing work to validate the blockchain and mint new BTC.
PoW is critical to the security of the Bitcoin system, as it deters bad actors who may try to manipulate the blockchain’s transaction data. Due to PoW, the amount of energy, time, and money needed to change the blockchain data is not practical or economical, as it would entail having an enormous amount of computing power to rewrite not just one block, but all subsequent blocks in the chain to cover up their tracks.
The Bitcoin network also has a built-in safety mechanism to prevent bad actors from taking over the system with sheer computing power by increasing the “mining difficulty,” or by increasing the difficulty of the puzzle.
The more miners there are in the system and the greater the collective computing power mining the network, the harder it will be for a computer to solve the problem. Currently, the network is super competitive and requires a very high hash-rate (a computer’s mining speed).
Individual miners often join mining pools where they pool their computational resources with others as a group in order to increase their chance of solving the hashing puzzle. Individuals in the mining pool are then given a share of the rewards based on their contributed hash power.
Large mining facilitators, or companies that provide mining-as-a-service (MaaS) for individuals, also make use of mining pools.
For example, Cloud Rush USA offers mining and hosting services within their Singapore-based mining pool.
Besides Bitcoin, another famous blockchain that uses PoW is Ethereum, although they are transitioning to another popular consensus mechanism known as Proof of Stake (PoS).
What is Proof of Stake?
In Proof of Stake, validators are selected randomly in proportion to the amount of cryptocurrency they hold of that blockchain.
In contrast to PoW, which requires computing hardware like CPUs or GPUs to mine, PoS requires no hardware at all. In PoS systems, validators are referred to as “stakeholders” rather than miners.
Let’s give an example of how PoS blockchains are “mined”.
The largest PoS blockchain by market capitalization is currently Cardano. To mine Cardano’s ADA cryptocurrency, validators simply hold ADA in their online Cardano wallet. Their holdings are then “staked” on the system. Stakeholders of Cardano receive a percentage of their total stake in return for updating the blockchain.
PoS models are seen as less energy-intensive and more ecofriendly, but there is still a lot of heated debate in the crypto industry about which consensus mechanism is better.
PoW and PoS aren’t the only consensus mechanisms out there.
There are plenty of unique consensus mechanisms that depend on the underlying function of the blockchain and what exactly miners or “validators” contribute to the network.
For instance, there is Proof of SpaceTime, Proof of Authority, Proof of Capacity, Proof of Activity and many more, but we’ll leave those for another article.
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